Throughout the U.S., more and more states, including California and Oregon, are tackling the retirement crisis head on with state-sponsored savings plans to cover workers without access to a workplace plan. Hawaii is one of the latest states to join the nationwide effort to address low retirement saving levels (and even lack of any savings at all!) from private sector employees.
Hawaii’s state-sponsored retirement plan: The stats and the basics
The AARP Public Policy Institute has estimated that about 50% of Hawaii’s private sector employees (roughly 216,000) work for an employer who doesn’t offer a retirement plan. Hawaii-based small businesses employ the majority of those workers without access to a way to sock away for retirement. Close to two-thirds of small business owners in Hawaii who responded to an AARP survey stated they don’t offer a retirement savings plan and agreed that the State of Hawaii should do more to encourage residents to save for retirement.
Two pieces of legislation, SB1374 and HB1189, are currently being considered by Hawaii’s Senate and House of Representatives. The overall plan is known as Hawaii Saves Retirement Savings Program. It is more often referred to as “Hawaii Saves” because it is modeled after OregonSaves, the state-sponsored savings program from the State of Oregon that has been place since 2017.
How Hawaii Saves works
The proposed State of Hawaii-sponsored retirement plan is a public-private partnership, with the state overseeing the retirement plan and a private company managing and investing employee contributions into traditional financial products. Workers’ accounts would be portable when they change jobs.
Hawaii Saves is modeled primarily on OregonSaves, which is cited both on the SB1374 and HB1189 bills. Models from other states, including Connecticut, Illinois, Maryland, Massachusetts, New Jersey, and Vermont, may also be taken into consideration. For a more general overview of other states and their retirement plan timelines: Small Business Owners Required to Offer Retirement Plans Under New State Laws.
Type of retirement account
The proposed bills don’t provide details as to what type of retirement account would be used but the experience of similar state-sponsored initiatives indicates that it would be a Roth IRA.
Annual contribution limit
In 2019, you can contribute up to $6,000 to an IRA, depending on your modified adjusted gross income (refer to worksheet on IRS Publication 590-A, Contributions to IRAs for rules on reduced contribution limits). Individuals age 50 and over are eligible to make an extra $1,000 in catchup contributions to a Roth IRA in 2019.
Using the OregonSaves as a template, we can expect an initial contribution (e.g. $1,000) to be invested in a capital preservation investment fund, such as a U.S. Government money market fund, and subsequent contributions to be invested in a growth-oriented target-date fund. Whether alternate funds will be available would depend on the decision of the elected governing body of Hawaii Saves.
Most state-sponsored aim to keep annual administration fees around 1% of assets under management or $10 per every $1,000 saved.
Still, all of these is yet to be determined. In their current form, the Senate’s bill calls for appropriate funding to kick off the program’s administrative and operating expenses, while the House version calls for a feasibility study, followed by a report to the Legislature by next session.
Will Hawaii Saves be mandatory?
The Senate bill includes a clause stating that Hawaii saves would “require an employer to offer its employees the opportunity to contribute to an account in the program through payroll deductions.”
This legal mandate is expected to make this plan efficient and cost effective. However, not all business will be required to enroll at once. Hawaii Saves is likely to follow a registration schedule in which would require large employers (100 employees or more) first to comply and later spread to smaller businesses. Small businesses with 5 or fewer employees are generally the last ones on the schedule to be required to comply.
No matter whether they employ one or hundreds of individuals, all Hawaii businesses will need to do something: enroll employees or file a Certificate of Exemption.
What happens if your company already offers a 401(k)?
If your business or organization already offers a qualified plan, such as a 401(k) or 403(b), to all of your employees, then you don’t need to facilitate Hawaii Saves for your employees. Still, you will need to verify or declare the retirement savings program to the State of Hawaii and complete some form of certification process to receive a Certificate of Exemption.
Eligibility of employees: Which employees qualify?
In its current form, Hawaii Saves provides for automatic enrollment of employees working for Hawaii-based companies that have not offered to some or all of its employees a qualified retirement plan including but not limited to a plan qualified under section 401(a), section 401(k), section 403(a), section 403(b), section 408(k), section 408(p), or section 457(b).
There is a small wrinkle. If Hawaii Saves were to only offer a Roth IRA, then you can only enroll in the plan if you meet the following income thresholds in 2019:
|Tax filing status||Modified Adjusted Gross Income|
|Single, head of household, or married filing separately and you don't live with your spouse at any time during 2019||Up to $137,000|
|Married filing separately and you live with your spouse at any time during 2019||Up to $10,000|
|Married filing jointly or qualifying widow(er)||Up to $203,000|
To try to include as many workers without a workplace retirement plan, some state-sponsored plans provide the option to contribute to a traditional IRA which lacks these income thresholds. This is likely to take place in Hawaii.
AARP estimates that 16,235 workers making over $63,500 aren’t covered by a workplace retirement plan. That’s 7.5% of all Hawaii workers whose employers don’t offer a retirement plan!
Are employers allowed to make contributions to employee accounts?
Like other state-sponsored retirement plans, Hawaii Saves allows no employer contributions to employee accounts.
The bottom line: Stay informed and shop around for alternatives
Hawaii Saves is fighting an uphill battle. Senate Bill 1374 was declared dead in 2019 as the meeting for the bills to be reconciled and advanced were cancelled just 20 minutes before the deadline. Without an agreement on the final version of the bill, the Hawaii Saves bill is done for the year.
Supporters and advocates of Hawaii Saves, including AARP Hawaii, have made public statements vowing to push again for the bill in 2020. But Hawaii employers and employees would still have to hold their breath for a long time: the bill will take effect on July 1, 2050, if approved.
If the prospect of a state-sponsored retirement plan excites you and you don’t want to wait until 2050, then take action now and start shopping around for ways to provide a much-needed retirement saving option for your employees.
If you’re looking for a 401(k) to offer your employees, click here to request more information about Human Interest.